For nearly four months the Hastings Diversified Utilities Fund has been resisting a $1.2 billion takeover bid from fellow pipeline owner APA Group. On Friday it may have got a little help from the Australian Competition and Consumer Commission.
On Friday the ACCC published its "statement of issues" in relation to the offer and made it clear that it has some significant issues with the bid.
APA is a major player in gas transmission in eastern Australia – it is the country’s largest gas transmission business – while Hastings has pipeline assets in south-west Queensland, the Queensland/South Australia/NSW link, the Moomba to Adelaide pipeline and the Pilbara pipelines in Western Australia.
The commission’s primary concern, it says, is that the acquisition of Hastings by APA would leave APA owning the majority of gas transmission pipelines in eastern Australia and, in particular, owning all the pipelines servicing the Cooper Basin in South Australia and all the pipelines servicing Adelaide. The commission said a successful acquisition would result in APA owning more than 80 per cent of the transmission pipelines in eastern Australia.
That could, it said, provide APA an increased incentive and ability to raise transportation charges on the Moomba-to-Sydney and Moomba-to-Adelaide pipelines, standardise pricing and service offers and raise the price of ancillary services.
An ACCC statement of issues isn’t a definitive statement of opposition by the commission to a proposed takeover but it does provide some insight into its thinking.
In this instance it clearly has major concerns, given it said on Friday its preliminary view was that proposed undertakings by APA, which include the divestment of its 50 per cent interest in SEA Gas and five-year price ceilings on some of its offerings, would not address the competition concerns.
APA, which owns 21 per cent of Hastings, has made little progress with the bid since it was announced in December, with Hastings rejecting it as inadequate. APA, which knew from the outset that the proposal to merge two of the three major gas pipeline owners would be intensely scrutinised by the ACCC and therefore that the process would be protracted, has almost inevitably been keeping some firepower in reserve pending the outcome of the ACCC’s inquiries.
What makes the strength of the ACCC’s concerns particularly interesting is that, while APA is bidding for Hastings, another big gas pipeline portfolio is also on the market.
Singapore Power has had the gas transmission assets in its Jemena vehicle on the market for months. Among Jemena’s key gas assets are the Eastern Gas pipeline between Victoria and New South Wales and the Queensland Gas pipeline between the Surat and Cooper basins and the Gladstone/Rockhampton region. The Queensland Gas pipeline would tie neatly in with Hastings’ own pipelines between South Australia and Queensland.
In the normal course of events Hastings might be considered an interested party in the Jemena process but it would be a brave board which, with a live offer on the table, would risk the ire of their shareholders by rejecting a premium and putting their company beyond takeover by making a major acquisition.
The strength of the ACCC’s concerns might, however, change the dynamics. Hastings shares are down about six per cent today as the market has digested the statement of issues and presumably come to the conclusion that APA is going to struggle to get an ACCC clearance for its offer.
That may make it easier for Hastings to convince its security holders that it needs to get on with business as usual and participate, if the terms stack up, in any remaining industry consolidation while there are still opportunities. The Jemena process, said to be prolonged by Singapore Power’s ambitious asking price, appears to nearing some form of conclusion.
APA has been stalking Hastings for more than two years as part of an acquisition strategy that has seen dramatic growth in the size of its own portfolio of transmission assets and the creation of the country’s largest gas infrastructure owner.
It said on Friday that it was reviewing the ACCC’s statement of issues and would continue to work with the commission to resolve its concerns.
The stakes for APA are high. If it can acquire most of the second-largest gas infrastructure owner, and one whose key assets are highly complementary to its own, it will have essentially completed its decade-long acquisition strategy and have cemented its standing as the dominant and most diversified of pipeline groups. If the ACCC blocks it, it will have to reconsider its growth strategies.